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The mortgage tax deception

If nothing I say following this sentence makes sense remember this statement, “No investment is as secure as a paid off debt.” Although the stock market has averaged a 12 percent rate of return over a long-term track record, whenever you’re forecasting stock returns, you’re talking about potential after tax returns. However whenever you’re forecasting paying off debt, you’re talking about a guaranteed tax-free return. In reality given the fact that the risk elements in paying off debt versus investing are at opposite ends of the spectrum, you really cannot compare the two. So often people rationalize it makes more sense to invest whatever extra money they could come up with and earn a 15 percent return versus paying off a mortgage with a lower interest rate. For comparison sake it’s worth giving mathematical value to a paid off debt. Let’s assume that the Jones family has a household income of $52,740 per year or $4,395 per month. Conventional wisdom suggests that we save and then later invest 10 percent of our income. 10 percent of $4,395 per month is $440. Instead of investing the $440 per month, the Jones family decided to leverage this money to get completely out of debt. They currently have monthly debt payments of $1,597 per month with a total debt balance of $118,000. By following a systematic debt elimination plan, using the extra $440 to accelerate the payoff process by paying off one debt at a time and using a snowball, domino effect to eventually payoff all debts, they can be debt free in 7-years. This will save them tens of thousands of dollars in interest expenses—not to mention the immeasurable return on investment called peace of mind. More importantly it will free up their old monthly obligation of $1,597 per month. That’s like having a nest egg of $191,640 earning 10-percent per year. To build a nest egg of $191,640 investing $440 per month over 7-years, you will need to yield a rate of return of 43.68-percent per year. I don’t know of many stocks yielding that type of return.(Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Damon can be reached at 412-216-1013.)